We saw last time that the U.S. Supreme Court held in NFIB v. Sebelius that the Obamacare individual mandate was beyond the power of Congress under the Constitution’s Commerce Clause. Nevertheless, the court went on to hold that the individual mandate was a permissible application of Congress’s taxing power, a ruling for which the conservative legal movement has never forgiven Chief Justice Roberts.
Taxes versus penalties
In this reading, the individual mandate was not a requirement that people buy insurance, it was rather a tax on those who chose not to do so. The Chief Justice recognized that the “most straightforward reading of the mandate is that it commands individuals to purchase insurance.” Nevertheless, for constitutional purposes, the “question [was] not whether that is the most natural interpretation of the mandate, but only whether it is a ‘fairly possible’ one.”
The “essential feature” of a tax is that it “produces at least some revenue for the Government.” And in the event that a person failed to obtain mandatory insurance, the only consequence under the mandate was that they had to make an additional “shared responsibility” payment to the IRS as part of their annual taxes.1 The Congressional Budget Office projected that the individual mandate would result in the government collecting several billion dollars by 2017.
On the other hand, the Affordable Care Act itself referred to the payment as a “penalty” rather than a “tax.” But the court took a “functional approach” to determine whether the mandate was a tax or a penalty, rather than just relying on how Congress referred to it in their legislation. Because the shared responsibility payment was collected by the IRS through normal tax procedures, was limited to the amount that the person would have paid for insurance, and contained no element of “scienter” (intention to break the law), the Chief concluded the mandate could fairly be characterized as a tax and not a penalty.
Direct taxes
But if the individual mandate was a tax and not a regulation of interstate commerce, an additional thorny consideration reared its ugly head: was the tax “direct” or “indirect” under the Constitution? Article I, sec. 9 provides that:
No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.
Direct taxes are also mentioned in article I, sec. 2, the infamous Three-Fifths Clause;
Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons.
Thus, direct taxes must be apportioned, meaning that the tax is the same amount per person in every state, based on the population established in the Census. This means that, for example, if one state has twice the population of another, twice the amount of taxes must be collected from the first state compared with the second. The shared responsibility payment was not apportioned among the states in that way. The distribution across states would instead depend on how many people in each state decided to forego purchasing insurance. So if it were a direct tax, the individual mandate would be unconstitutional.
Capitations and duties
What are “direct” taxes? The Constitution does not tell us. But sec. 9 seems to say that a “capitation” is one kind of direct tax. A capitation is a “head” tax, meaning a tax on each person as such. It makes sense that a capitation would be a direct tax because it’s automatically apportioned among the states. The amount of tax revenue derived from each state will always reflect its population when each person is assessed a “head” tax.
Section 8 also tells us that “Duties, Imposts, and Excises shall be uniform throughout the United States.” A duty, which is a tax on an import, seemingly can never be both uniform and apportioned because the number of imports into a given state is not related to its population size. To be apportioned, there would have to be different duties in different states to adjust for the disconnect between the imports and the relative populations. Thus, they could not be simultaneously uniform. It is often inferred, then, that duties, imposts, and excises, are examples of indirect taxes.2
So we might be tempted to conclude that only capitations are direct taxes, because only a tax on each individual will result in apportioned taxes. And that would appear to make sense of the terminology. Taxes are “direct” because they directly tax persons as persons. “Indirect” taxes tax them only derivatively by taxing other things. But, section 9 clearly refers to capitations and “other” direct taxes. What are they?
Chief Justice Roberts did not try to provide a comprehensive definition of direct taxes in Sebelius. Based on previous cases, however, he identified several other possible types of direct taxes: taxes on land, personal property, and income from personal property. Since a tax on not having insurance was not like any of those, he concluded the shared responsibility payment was not a direct tax and did not require apportionment.
Wealth taxes
Although Chief Justice Roberts dodged the question of what constitutes a direct tax, the issue still beguiles us. There are periodic proposals to institute a federal wealth tax, meaning a tax on property, but opponents object that such a tax would be a direct tax requiring apportionment. If so, taxes on wealth could vary depending on what state the taxpayer lived in. Besides being administratively impractical to implement, such a tax would be politically toxic. Discussing a potential “billionaire” tax on the hyper-wealthy, Professor Brennan describes some of the difficulty:
[I]t seems that Congress would have to decide how much total revenue it was going to raise and then apportion that amount across the 50 states in accordance with their populations. So, if all the billionaires live in one state, and Congress levies a tax that’s going to collect 20% of the billionaires’ wealth, all 50 states will have to pay that, rather than the one state where they live, or the billionaires themselves. The consequence would be that the billionaires would pay relatively little and the rest of the country will bear most of the burden of that tax.
The shared responsibility payment was zeroed-out in 2019.
I’m not super confident I know what imposts or excises are but they are presumably also transactional taxes not related to state population size.